Water is Too Cheap! Here’s Why Raising the Price Now will Make it Affordable.

How much should the content of my pitcher cost?

For the sake of the game, I’ll be auctioning it. There is exactly one liter of tap water inside – our bailiff checked.

You can start sending in your offers in the comments, the first one to find the right price will win… my eternal consideration and admiration.

This is part of the special series of “Water & Wastewater 101” episodes we run on the (don’t) Waste Water podcast!

Water Tariffs around the World

To guess that price, you’re missing a critical information: where do I sit right now.

Water tariffs vary widely, depending on the place you live. For instance, if you’re in the US Virgin Islands or in Gibraltar, a cubic meter – so one thousand of those water liters – will cost you a little under 7 dollars.

In Monaco, Curaçao or Bermuda, it would be around 6 dollars, 5 dollars in the Cayman Islands, 4 in San Francisco, and so on, and so on, up to Dublin and the entire Ireland where it is simply free.

(We’ll come back to that!)

Let’s not forget here about all the places of the World where you simply don’t have any tap water available – let alone any access to safe drinking water. 

Don’t worry, that only concerns one-fourth of humanity!

Not funny.

So what makes for water’s price, and why does it vary so widely from one place to another?

Understanding the Cost of Water

To understand this, we’ll first have to switch from price to cost. So let’s forget about how much we’re asked to pay, and let’s focus on how much it costs to bring safe drinking water up to our tap.

In an ideal world, I would have a source of drinking water in my garden. Plus, my garden would be sloping so that that source would be about 35 meters higher than my house. 

I would have to install some piping once, but that is negligible in terms of costs. And the 35 meters difference provides me with 3.5 bar or 50 pounds per square inch pressure at my tap, which is what we’re accustomed to, on average.

Here, my costs are very simple: it’s zero.

Pumping Water

Now, most of the time, that source of drinking water would not be directly in my garden but a bit further in my village or city. And it may not be at a higher place than my house.

So now, my local utility has to lay down some pipes to supply my neighbors and me, and it has to pump that water so that I still get my delicious 3.5 bar at my tap, regardless of where I live within the city.

This starts to have some costs, both in investment – to lay down the pipes and buy the pumps, and in operations – to power the pumps and maintain the network.

But that case is still pretty ideal because most of the time, raw water won’t be so pure and wholesome that it is directly potable. 

Treating Water

Hence, quite often, you’ll have to treat this water. Very lightly if you’re lucky, with maybe a filter and a disinfection, or very heavily, if you’re less lucky, with a coagulation, a flocculation, an ozonation, an ultrafiltration or at the extreme, a desalination. 

All of that adds to the costs, again in investment – to buy all that equipment, but even more in operation – to power and maintain all this stuff and employ the right people to operate it.

Now, that is only one-half of the story. Because whenever you’re done with that drinking water, you’ll probably want to get rid of it.

And unless you just opened your tap to watch the water flow and return it directly to nature, chances are that you’ve polluted that Water a bit.

Managing and Treating Wastewater

I’ll not bore you by going into all the possible scenarios, but you certainly understand that depending on the level of pollution you’re introducing in that water, or where you’re located, your local utility will have to add more or less treatments at the outlet, lay more or less pipes to collect your sewage, and employ more or less people to deal with all of this.

When you add up everything we just covered, you obtain the cost of water.

And unless you all have spring water in your garden at the top of a slope, I guess you now understand why water can’t be free.

Defining the “Cost” or “Price” of Water

By the way, when we’re saying “cost” or “price” of water, the name is maybe misleading. In fact, it’s the cost or price of water treatment, fluid handling, network maintenance, and water service. 

But I’m french and lazy, so I’ll keep saying just “water” for the rest of this article. Insult me in the comments!

From Water Cost to Water Price

So, water has a cost. But how much of that cost, shall we charge to people, to turn it into a price.

Regulations, like the European Water Framework Directive tell us that we shall “take account of the principle of recovery of the costs of water services, including environmental and resource costs.”

The EU Water Framework Directive indicates how to set Water Tariffs

Note that I haven’t covered those yet, because unless you’re Danish, I’d bet that your local utility doesn’t charge you for that. They should, but they don’t. Who cares about the environment? 

The beauty of that EU regulation is that it contains its own kryptonite in the same article, as it continues with: “some flexibility and lower recovery rates are allowed if appropriately justified.” 

Look who is now entitled to justify whatever he wants!

Building a Water Tariff around the World

Hence, some good pupils include operating costs, investment costs, and financial interests associated with the loans you have to contract for your investment in the water tariffs – like the UK or Italy.

Some more only cover operating and investment costs – like the US.

And a vast majority only covers the operating costs, quite often only partially.

In a nutshell, water prices worldwide usually simply don’t cover the water costs, even in their most restrictive definition.

And I do believe this is a bad thing.

The Two Main Objections at a Raise in Water Tariffs

Now, there are usually two objections whenever I address this topic. First, water shall be free because 99% of the molecules in our body are actually water. 

But water IS free! What’s not is its sourcing in a ground or surface water reservoir, its treatment, its conveying in an infrastructure that has to be built and maintained, its handling once used, its treatment, its discharge to the environment, its impact, and its overall management as a resource.

Did I sound upset? Sorry. 

Then, if you want to make a basic supply of some liters per day and person free, fine! As long as it is part of a tariff structure where, at the end of the day, you’re still fully recovering the costs of the Water Service. 

It’s gonna be artificially free, but technically speaking, the first let’s say 15 liters may be free.

Second Objection: Water Tariff shall Keep Water Affordable

Then, the second objection is – in my humble opinion – much more valid.

It’s easy for me, living in beautiful France, with a good job, to say that my water is too cheap, and I shall pay more. I’m privileged, and I know it.

After all, access to water is a human right, and it sounds wrong to say that we shall pay more for a human right.

Now, to be precise, the human right is not bluntly to water, but to affordable water.

Which raises the question of how affordable is water, and how affordable would it still be, if we were to fully recover the costs through water tariffs.

Defining the Affordability of Water Tariffs

Today, in OECD countries, water can represent as low as 0.2% of a household’s average income in Italy or Mexico and up to 1.4 percent in Hungary, Poland, or Slovakia.

When it comes to defining affordability, international financial institutions generally agree to place it somewhere between 3 and 5 percent of a household’s income. So at first sight, we may conclude that – at least in OECD countries, water is in fact affordable today.

Now, on the second look, and if we focus on the 10% poorest people in those countries, the picture changes. 

Average Water Affordability Vs. Affordability for All

If we define affordability as 3% or less, the bottom decile of countries like Mexico, New Zealand, Germany, Czech Republic, Hungary, Slovakia, or Poland will all experience unaffordable water.

That’s why tariffs enabling full cost recovery still shouldn’t mean that everybody pays the same. You can leverage cross-subsidies from other users to establish a social water tariff by playing on the tariff structure.

And still, we’re talking here of OECD countries, which probably aren’t the most to be pitied. 

So how can I still, without blinking, ensure that water should be more expensive?

The Hidden cost of Water Today

Well, look at the situation today. Water is not your everyday consumable. If you don’t have a safe source of water, you’ll die. Whether directly from thirst or indirectly from waterborne diseases.

This means that today, one way or the other, every human on Earth is fighting hard to get his share of mandatory water to sustain his and his family members’ lives. 

And that doesn’t come for free. For instance, in Papua New Guinea, the bottom income decile of the population spends 54% of their daily earnings for 50 liters of water, which is the minimum daily amount needed to cover basic needs according to the World Health Organization.

To take just a few more examples, in Madagascar or Mozambique, as soon as you don’t have access to at least a community tap, you’ll have to spend 45% of your income on water.

That’s what’s at stake. Utility water, be it central or not, served in your house or in your community, will always be much cheaper than any other type of supply.

A path towards Affordable Water for All

And in his “Global Water Funding” book, David Lloyd Owen provides an affordable tariff scenario, split down by geographical regions, where the bottom 20% of households, ranked by income, never have to allocate more than 4% of their revenue to water and sanitation services. 

As a result, these tariffs would cover 91% of the World’s financial needs to provide water and sanitation for all – aka SDG6, and arguably at a cheaper expense for the poorest inhabitants of Earth than the status quo where they need water dealers. 

Hence this governing principle: for water to be affordable for all, we need it to be collectively provided and managed. That way, we can leverage scale effects, ensure quality, and collectively share the costs.

Now, you may wonder: we’ve seen that currently, utilities aren’t reaching full cost recovery at all. So how do they cope with that financing gap?

How is the Water Sector Financing itself today?

Well, it can take many shapes, but roughly speaking, there are two ways to cover those costs:

  • Subsidies, direct or indirect, linked to other water charges or entirely external
  • Transfers. Wait, I should have added some quotation marks. “Transfers.” This basically means that you whether decide that pollution through wastewater is OK, and someone will have to pay someday to depollute. Or, you transfer the charge of, for instance, infrastructure renewal to the next generations.

Then, don’t get me wrong either; not achieving full-cost recovery through water tariffs is not necessarily a deadly sin. 

Because if water operators know that they entirely rely on tariffs, they may discard network extensions to poorer areas, as they may fear those people won’t pay – even if data proves otherwise.

Water “3Ts” Vs. Full Cost Recovery through Water Tariffs

But back to my point, many international studies have proven a “3T” mechanism to be effective, where full-cost recovery is achieved through the combination of Tariffs, Taxes (aka subsidies), and Transfers (in this definition, from donors or charities).

The thing is that two of these “Ts” come with major risks. Transparency International estimates that ten to thirty percent of water funding is being lost to corruption, while a 2020 research paper suggests that 7.5% of Official Development Assistance is siphoned off to offshore accounts – those leakages rising to 15% for the most aid-dependent nations.

That’s why, even if you go for the “3Ts” you shall still have a significantly higher weight on the first one, as it turns out to be the more virtuous one. 

Moreover, Water Tariffs have two additional welcome side effects. First, they send a direct signal regarding the value of the Water Resource and of the Water and Sanitation Services.

The Welcome Side Effects of better Water Tariffs

Then, they bring an incentive for more worthy practices.

Let me take an over-the-top example to illustrate this. Supplying water to the international space station is quite a challenge. You need to wrap it in a rocket, and that additional weight doesn’t really help to take off.

When you add up all of the costs, one liter of water delivered at the ISS tap – assuming it exists – costs 22 thousand dollars. 

Hence, the incentive is exceptionally strong to reduce as much as possible the water use up there! 

This is why, the entire system, with four astronauts on board, is designed to run on only one glass of water per day, thanks to humankind’s most advanced water recycling tools.

Now if we’re capable of running a system with over 90% recovery rate in the most hostile environment there is, you can bet that we could do the same on Earth. It would just be very expensive. 

Water Tariffs as a way to enable better technologies

So without going to that extreme, when water tariffs increase, they not only better represent water’s value. They also enable new technologies, which thus become economical.

You can visualize this as a scale: treatment technologies are waiting on various price heights to be activated, as soon as the water price reaches them.

This means that, as long as we’re artificially maintaining those prices lower than they really are through indirect funding, we’re preventing those technologies from growing and flourishing. 

And I say technology, but that’s true for all kinds of water treatments, including nature-based solutions or biomimicry!

So, is Ireland really any different?

So let’s close with my opening example. Do you believe that Ireland has a special trick that makes water treatment or pumping free? For sure not. 

Water Services cost the land about 1.2 billion euros a year. Which they finance through taxes. On top of that, 8% of the population belongs to group water schemes, which indeed are a form of decentralized water management. 

These 8% actually live a first-hand experience of full-cost recovery schemes. Meanwhile, the other 92% have to rely on the government’s sagacity to manage water services optimally. All in all, they’re not paying less; they’re just a bit more blind.

If you’d like to understand how the bottling industry basks at our inability to finance and provide water for all, have a look at this video.

And if you’d like to dive deeper into the topic of water price, tariff and valuation, make sure to join our next live with Björn!